Earnings Preview: DuPont

Chemical and industrial products behemoth E. I. du Pont de Nemours and Company (DD - Analyst Report) is scheduled to report its third-quarter 2012 results before the market opens on Tuesday, October 23. The Zacks Consensus Estimate for the quarter is 46 cents per share, representing an estimated year-over-year decline of 33.5%.

With respect to earnings surprises, the company has surpassed the Zacks Consensus Estimate in all the trailing four quarters. This is reflected in the average positive earnings surprise of 8.63%.

Previous Quarter Performance

DuPont reported adjusted earnings of $1.48 per share in the second quarter of 2012, exceeding the Zacks Consensus Estimate of $1.46 and the year-ago earnings of $1.37 per share. Growth was primarily driven by strong performance in agriculture, food and bioscience businesses, along with the company’s advanced materials business, which witnessed healthy results despite weak European markets.

Including one-time items, earnings came in at $1.25 per share versus $1.29 in the prior-year quarter. The year-over-year drop reflects lower sales volumes across several segments and weak demand for titanium dioxide, especially in Europe and Asia.

Net sales grew 7% year over year to $11,006 million, driven by price hikes and portfolio changes, partially offset by unfavorable currency impact and lower sales volumes. However, sales missed the Zacks Consensus Estimate of $11,252 million.

Company’s Guidance

DuPont expects full-year 2012 adjusted earnings to come in at the lower end of its previous outlook of $4.20 to $4.40 per share (excluding one-time items), due to macroeconomic and currency-related uncertainties and a higher tax rate.

Estimate Revisions Trend

Agreement

Estimates for DuPont show limited movements over the past week. Over the last 7 days, there has been no upward revision in the third quarter estimate by any of the 14 analysts covering the stock. However, two analysts have reduced their forecasts over the same period. For 2012, none of the 11 analysts revised their estimates in either direction.

Estimates for the third quarter elicit a comprehensive downward drift over the past month with 8 analysts lowering their forecasts while none moving in the opposite direction. Estimates for 2012 demonstrate a negative bias over the last 30 days with 5 analysts lowering their forecasts while none taking the opposite route.

Magnitude

Estimate for the third quarter has decreased by a penny over the last week. Given the directional pressure from a number of downward revisions, estimate for the quarter has dipped by 8 cents over the past month.

Estimate for fiscal 2012 has not shown any movement over the last week. Over the last month, estimate for the year has decreased by 15 cents. The current Zacks Consensus Estimates for 2012 is $3.98, representing a projected year over year increase of 1.23%.

Our View

DuPont successfully completed the acquisition of Danisco in May 2012, which led to increased earnings during the second quarter. The company has adopted aggressive acquisition and joint venture strategies to facilitate its transformation from an industrial chemical maker to one that has diversified businesses ranging from bulletproof vests to solar panel films.

The company is currently pursuing an aggressive cost-cutting strategy by reducing fixed costs, retrenching employees, restructuring work schedules and improving working capital productivity.

Also, markets for the company’s agriculture and food businesses continue to be strong. However, DuPont faces stiff competition from The Dow Chemical Company (DOW - Analyst Report) and BASF SE (BASFY), in addition to weakness in the housing and construction markets. Moreover, sluggish economic conditions might prove to be headwinds for the company.

Higher energy and raw material costs, if not offset fully by the increase in prices, may have a significant impact on the company’s results. The demand of titanium dioxide, which is used to give paint and other coatings a white hue, remained weak in the second quarter of 2012 leading to lower volumes in the performance chemicals business.

Currently, we have a long-term (more than 6 months) Neutral recommendation on DuPont. The stock currently holds a Zacks #5 Rank, reflecting a short-term (1 to 3 months) Strong Sell rating.